10 Questions
What does the operating activities section of the cash flow statement focus on?
Employee salaries, supplies, rent, utilities, and depreciation
How are cash equivalents defined in the context of a cash flow statement?
Highly liquid investments that can be quickly converted into cash
In the example provided for the small coffee house, what was their net profit for the year ended December 31, 2023?
$86,729
Which financial activities are considered under operating activities in a cash flow statement?
Employee salaries and utilities paid
What does the cash flow statement break the analysis down into?
Operating, investing, and financing activities
What is the purpose of companies holding cash equivalents?
To ensure they have sufficient cash for short-term obligations
In the context of the coffee house example, what are considered cash equivalents?
Bank accounts, treasury bills, and commercial paper
How would the coffee house calculate its cash from operating activities?
$71,904
What should be considered when analyzing a company's financial health according to the text?
Both operating activities and cash equivalent sections of the cash flow statement
Which of the following is NOT a form of cash equivalent mentioned in the text?
Real estate investments
Study Notes
Cash Flow Statements
A cash flow statement is one of three main financial standard reports that provide information on a company's revenue, expenses, investments, financing, and sources of cash during a specified period. It shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. This section focuses on the two sections required by the IFRS - Operating Activities and Cash Equivalents.
Operating Activities
The operating activities section of the cash flow statement provides details about cash inflows from business operations and cash outflows from these same causes over the reporting period. These can include items like employee salaries, supplies purchased, rent, utilities paid, and depreciation from assets used in daily operations.
Example of Operating Activity Calculations
For example, let's consider a small coffee house selling hot drinks. Their net profit was $86,729 in the year ended December 31, 2023. Here's how they might calculate cash from operating activities:
- Starting cash balance: $14,825 in cash and $9,230 in cash equivalents.
- Cash from operating activities: $86,729 - $14,825 = $71,904.
- Add cash and cash equivalents balance at the end of the year: $71,904 + $9,230 = $81,134.
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into cash. These are often held by companies to ensure that they have sufficient cash to meet short-term obligations and to take advantage of investment opportunities.
Example of Cash Equivalents Calculation
For the coffee house, they might have cash equivalents in bank accounts, treasury bills, or commercial paper. To calculate their cash equivalents, they would add up all their bank accounts, treasury bills, and commercial paper at the end of the year:
- Starting cash balance: $14,825 in cash and $9,230 in cash equivalents.
- Cash from operating activities: $86,729 - $14,825 = $71,904.
- Add cash and cash equivalents balance at the end of the year: $71,904 + $9,230 = $81,134.
This way, the coffee house can provide detailed insights into their financial health by analyzing both operating activities and cash equivalent sections of their cash flow statement.
Learn about how cash flow statements provide insights into a company's financial activities, focusing on the operating activities and cash equivalents sections. Explore how to calculate cash from operating activities and determine cash equivalents for short-term investments.
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